Abstract:
A high ratio of Non-performing loans (NPLs) in the banking sector, particularly in commercial banks
(CBs), threatens financial stability, impedes the intermediation of funds from savers to borrowers, and
reduces investment and economic growth. Monetary policy dynamics are viewed as potential drivers
of NPLs. In this regard, the main objective of this study was to test the hypothesis that monetary policy
dynamics influence NPLs in Tanzania. Using panel data from 2011 to 2020, the study used a one-step
system generalized method of moments (GMM) approach to estimate the effects of monetary policy
dynamics on the percentage growth of NPLs. The results are presented for both bank size and
ownership category. The study found a significant positive impact of monetary policy dynamics on the
growth of NPLs. The results indicate that the occurrence of monetary policy dynamics affects the
lending decisions of CBs and borrowers' cash flows, leading to a decrease in the debt-paying abilities
of bank customers. Therefore, the study recommends that banks pay more attention to the monetary
policy dynamics to balance security, liquidity, and profitability when serving the real economy.
Furthermore, the policymakers should create a stable monetary policy; in effect, this will help reduce
the growth of NPLs, improve bank profitability, increase the financial intermediation capacity of
banks, and subsequently boost economic growth in Tanzania.
